This post was originally published on this site
Few policy proposals have been so controversial on this year’s presidential campaign trail as Elizabeth Warren’s proposal to hit the rich with a wealth tax.
The Massachusetts senator wants to slap a 2% annual tax on households worth more than $50 million — rising to 6% on those worth more than a $1 billion.
The idea is to shift more of the tax burden from the middle class, who live on income, to the rich, who live on assets. According to the Federal Reserve, the richest 1% of households have about 40% of all the wealth in the United States, a figure that has risen by about a third since the end of the Reagan era in 1989.
Warren’s idea has been slammed by some among the rich, criticized by others, and generated skepticism from members of the establishment such as former Treasury Secretary Larry Summers.
But as New York University professor Edward Wolff points out in a new working paper, the idea isn’t new.
In total some 13 advanced economies in the OECD have had some version of Warren’s wealth tax since the 1970s, he observes.
How’d they do?
Well, eight of the 13 have since abandoned the tax, he says.
And the other five have found the results disappointing. Their wealth taxes have raised relatively small amounts of money — although with the caveat that they were levied at far lower rates than Senator Warren is proposing, Wolff writes in his paper.
“Spain abolished its wealth tax on January 1, 2009, but then reintroduced it in 2012,” Wolff writes. “Austria and Denmark discontinued their wealth tax in 1995, Germany in 1997, Finland and Luxembourg in 2006, and Sweden in 2007.” Iceland dropped its wealth tax, reintroduced it briefly after the financial crisis, and then dropped it again in 2015. France, on the other hand, reintroduced a wealth tax in 2011, he notes.
Typically countries with wealth taxes have levied them at rates far lower than Warren’s proposal — often at 1% or even less of net worth. Germany, for example, levied a flat wealth tax of 0.5%.
One exception was Sweden, although even there the figures didn’t go nearly as high as Warren’s 6% billionaire tax. Sweden levied a top rate of 3%, but has since abandoned the tax altogether.
Wolff notes that European countries levying wealth taxes faced problems. Some rich people hid their assets and avoided the tax illegally. Others just left the country.
Wolff estimates Warren could theoretically raise more than $300 billion a year from her wealth tax proposals. But avoidance, legal or illegal, becomes the key factor.
“Even the 3% [rate] by itself is enough to induce capital flight and maybe emigration,” he said in a phone interview. [Warren’s original proposal was for a 3% top rate] “I don’t think the rich are stupid.”
Two caveats: The United States, unlike European countries, taxes its citizens worldwide and levies severe penalties on anyone failing to disclose overseas bank accounts. And financial regulations since 9/11 have made it much harder to hide wealth inside the U.S.
“This paper confirms what other objective expert analyses have shown — Elizabeth’s wealth tax can fund critical middle-class investments in education and child care just by asking the very wealthiest Americans to pitch in a few cents,” said Warren spokeswoman Salomi Sharma in a statement.
Meanwhile, Wolff notes that Warren could probably raise about two-thirds as much money by applying the much more modest, and doubtless less controversial, Swiss wealth tax system to the U.S. It would kick in at net worth about $120,000, meaning about 44% of U.S. households would pay something. On the other hand, the bottom rate is just 0.05%, rising to 0.3% at the very top. That would generate an extra $189 billion in tax revenues a year, Wolff estimates.
